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Present Strategies Of Nutraceutical Multilevel Marketing Companies in China

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Multilevel marketing companies have worked hard to adapt their business practices to meet the Chinese market demands.

The Retail/ Single Level Switch
The conversion from MLM to retail required a serious shift in MLM thinking and practice. At the time of the ban, Amway had already invested more than US$100m, Avon US$70m and Mary Kay another US$20m (“When the Force is Against You,” 1998, p. 5). This ban put hundreds of millions of dollars worth of equipment and liabilities at risk. The jump to retail sales was meant to protect investments and also to diversify revenue stream. Some of the specific changes in the Chinese-MLM strategies are listed below (“When the Force is Against You,” 1998, p. 5):

• Avon. Distribution branches were converted into retail and wholesale stores. Kiosks were opened in partnered-national retail chains and sales promoters and customers were allowed special customer discounts. Avon has more outlets than any other nutraceutical MLM company in China with 6,300 beauty boutiques and 1,700 beauty counters (“Still Off the Doorstep,” 2005, p. 2).
• Amway. Product distribution centers were converted into retail stores. Small fees allowed up to 15% special customer discounts on all purchases. Sales promoters can do product demonstration and customer follow-up. Sales promoters deliver items to customers homes and receive payment on commission. Amway has around 130,000 sales representatives selling some 180 products. It also operates more than 130 retail stores (“Still Off the Doorstep,” 2005, p. 2).
• Mary Kay. Practices will change very little. Whereas Mary Kay sales transactions were mostly done in their “beauty centers” before the ban, their new policy required all sales transactions take place in their specified sales locations and sales promoters work on a commission-only pay. Mary Kay continues to hold beauty education classes to promote their products (Hulme, 2001, p. 43).
• Nu Skin. Arriving late into the market in 2003, Nu Skin has since invested more than US$100 and is operating approximately 115 outlets. Nu Skin has announced their plans to increase the number of its retail outlets to 200 by the year 2006 (“Still Off the Doorstep,” 2005, p. 3).

Effect on Revenues
Transition of business models was not a smooth ride for the big MLM firms. Months of no sales revenues, extensive employee retraining and internal restructuring took a toll on the recovering giants. As a result of the ban, the big companies’ yearly sales were cut nearly in half for the first year (“When the Force is Against You,” 1998 p.5). Since then, however, revenues have seen strong growth for many companies. In 2002, revenues from China’s total sales volume brought Amway RMB$6b, approximately US$750m. In August of 2005, Amway reported to have already met $2b. These revenues accounted for nearly one fourth of Amway’s total global sales (Li, 2005 par.11; “World Consumer,” 2003). Other companies such as Mary Kay and Avon also reported very strong growth (Hulme, 2001 p.43; Ui-Hoon, 2001 par.3). Mary Kay’s 2002 sales numbers exceeded US$120m), Avon’s exceeded US$220m. Such phenomenal growth is what initially attracted other global companies such as Nu Skin Enterprises to try for a share of the industry. Nu Skin Enterprises obtained over US$100m in sales for 2004 (“Still Off the Doorstep,” 2005, p.3).

Adapting to Chinese Business
Making the jump to retail sales is only one of the big steps that MLM companies are doing to adapt to business in China. The learning curve associated with pioneering a business in China requires time, resources and an extensive amount of learning. When commenting about doing business in China, Blackman wrote,

People are unable to start doing business in China as if they were in the developed West. A business [firm] must learn how the local scene works and then decide to what extent he or she will adapt to local ways (Blackman, 2000, pp.14-15).

Making Connections.

Using guanxi to effectively maneuver within Chinese business has quickly become a top priority among many of the leading MLM companies. By establishing strategic relationships with the government and other companies that operate in China, MLM companies open doors to many opportunities, both transparent and inconspicuous. In August of 2003, a recent program brought over 60 top Chinese mayors and officials to Utah and Boston for a leadership training seminar (“Chinese Government Officials Visit Utah to Study American System,” 2003, par.1) Shawn Hu, a major organizer of this project, stated that this program was largely sponsored by MLM companies in China (personal communication, November 16, 2003).

Avon, the fastest company to recover from the ban of 1998, used special relationships to gain acceptance from the Chinese government when faced with a problem in establishing their manufacturing operations. After initially failing to convince the central government of its direct marketing program, Avon acquired the assistance of David Li, the head of the Hong Kong’s Bank of East Asia. Li used his cordial guanxi with the Chinese government to successfully introduce Avon to the appropriate industry in southern China (Luo, 2001, p. 56).

Initial Strategies of Nutraceutical Multilevel Marketing Companies In China

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MLMs have been working to get into China for a long time. Here’s an abbreviated description of the obstacles and initial strategies…

Business as Usual
Like many businesses, nutraceutical MLM companies first penetrated China’s market using the same marketing strategies that had brought them strong success in their previous markets. After only 2 years of normal operations, Amway reached reported yearly sales of RMB1.5b. [approximately US$180m] in 1997 (Gee, 2002, par.3). Other companies reported high earnings in 1997; Avon reported sales of US$75m (“When the Force is Against You,” 1998, p.5) and Mary Kay reached approximately US$25m (Roberts & Kerwin, 1998, par. 5).

The low cost of effective labor and the market responsiveness to network MLM combined for great business success of MLMs in China. These factors proved to be a strong incentive for leading companies to invest millions of dollars into developing their Chinese operations. Avon, the first MLM company in China (Xu & Tian, 2000, p.1) invested US$70m to build a factory in Conghua and 75 nationwide branches. Amway entered the market in 1995, and invested approximately US$100m in a new factory in Guangzhou and 40 product distribution centers in 33 cities. In the same year Mary Kay invested more than US$20m in a factory in Hangzhou and 10 beauty centers throughout the north and east (“When the Force is Against You,” 2000, p.5).

Problems
The combined successes of manufacturing and MLM in China created a concern for the Chinese government. Recognized by the people as an entity whose responsibility is to maintain order and protection (Xu & Tian, 2000, p. 76), Chinese leadership had to choose between benefits and costs of MLM presence in China. On one hand the new industry introduced large influxes of foreign investment, helped alleviate unemployment, stimulated tax revenues and contributed to the growing economy. At the same time, by 1998 MLM networks had reached between 1.5 and 2 million distributors, thus creating some large, “uncontrollable sales network[s]…[and incentive for] a series of unethical and illegal activities” (Xu & Tian, 2000, p. 4). Chin-ning Chu, president of Asian Marketing Consultants, Inc., is reported to have said, “The Chinese consider companies like Amway to be like a religion, because they make people passionate about new ideas…. The Chinese government is very afraid of that” (Ligos & Cohen, 1998).

MLM Ideology. Many of the problems with MLM are a result of the inherent conflict of MLM ideologies and traditional Chinese socialist ideologies. Since the late 1940s, Western economic practices have been a topic of vehement criticism among Chinese government officials and media sources. Under the influence of Chairman Mao and the Communist Party, these ideologies penetrated into the Chinese socialist structure and policies.

MLM companies thrive from a campaign on financial freedom and self-employment (Amway, 2003, par.1). The emotional basis for involvement is expressed through small private gatherings in distributor homes and larger public assemblies. When asked how the government viewed MLM recruitment methods, Shawn Hu, a private consultant for the Chinese government, stated, “Private gatherings which spout financial independence and self actualization echo among government officials like the propaganda of Tiananmen Square and the Falun Gong” (personal communication, November 16, 2003).

Although contrary to many of the Chinese Communist principles, Chinese-mercantilism, guanxi, high unemployment and 50 years without freedom to choose jobs have all contributed to the high success rate of many MLM companies in China. Lyn Jeffery of the University of California points out that, “Multilevel marketing is perfect for China—it combines solid individualist urges with the ability to exist in an extended family” (cited in “Born-again marketers,”1997, par. 5).

Fear of Pyramid Schemes. MLM companies can appear to be pyramid schemes. In obtaining commissions and percentage of revenues from new promoters, even legitimate MLM’s can take on pyramid-like qualities. According to Xu and Tian, the World MLM Association reported that among all MLM members, 85% bought products for their own consumption, 15% intended to sell the products and only 1% really achieved success and chose MLM as a career (2000, p.4). By appearing to get the majority of revenues from inside the organization, Xu and Tian label all MLM companies as being synonymous with “Pyramid sales” (2000, p.9).

Abuse of Relationships. MLM uses the connections of distributors for recruitment and sales. In the Chinese culture, this system can be seen as exploiting the important guanxi and family relationships. Taking advantage of such special relationships is perceived as a detriment to Chinese society, brought about as the result of MLM companies in China (Xu & Tian, 2000, p. 6).

Imitators. As in any industry, the rapid success and large profits experienced by the MLM industry in China attracted hundreds of additional companies. By 1998 there were more than 500 registered MLM companies, with the estimated number of companies in actual operation reaching approximately 1,500 (Xu & Tian, 2000, p. 2). Legitimate MLM companies aside, the Chinese press published reports that accused many companies of using religious and revolutionary campaigning as a means to secure money and new distributor recruits for illegal and manipulative purposes (McDonald, 1998, par. 3; “When the Force is Against You,” 1998, p.5).

Government Actions
Negative media coverage continued and memories of Tiananmen Square and the Falun Gong made the Chinese government very cautious of MLM. In response to the huge influx of network marketers and the high number of reported frauds and media coverage on scandals, the government intervened to take action. On April 18, 1998, the government released the State Council Circular No. 10, which targeted MLM companies and banned direct sales companies in China (“When the Force is Against You,” 1998, p.4).
Specifics of the Ban. State Council Circular No. 10 identified direct sales operations as damaging to society and a deterrent for future social progress. This tightly drafted document prohibits companies from conducting any type of direct sales operations that is not government approved (“When the Force is Against You,” 1998, p.4). Companies were given until October 31, 1998 to comply (McDonald, 1998, par .5). The basic structure was outlined for existing firms to convert into a special retail-wholesale chain store while new companies were required to obtain a regular retail license. The responsibilities of qualified companies included many of the following key points (“When the Force is Against You,” 1998, p.4).

• Converted stores must sell only their own merchandise and only through their own retail or wholesale stores.
• Qualified companies must be approved by the appropriate government committees—Ministry of Foreign Trade and Economic Cooperation (MOFTEC) and Shanghai Administration of Ministry and Commerce (SAIC).
• Companies must decide if they will use nonstaff sales promoters or employed sales promoters. Different rules apply for each.
• If companies employ sales promoters, they must be partnered in a joint venture and have a minimum investment of US$10m.
• Companies with employed sales promoters must have labor contracts and take full responsibility for the actions of the promoters.
• Sales promoters must sell their items at the same price in all locations and must show their government issued promoter ID card when involved in direct or door-to-door selling.

Reactions. This policy decision caused an immediate response from the public and leading MLM companies. This action by the Chinese government strained business relations with the US and the watchful WTO, illustrating the arbitrary power of the government to control businesses in China. At the time of the ban, more than 20 million Chinese were already involved in direct sales and the MLM industry. Enforcement of the ban broke into public protest (Roberts & Kerwin, 1998, par. 3). The protest turned into riots and resulted in the deaths of ten people and injuries to an additional 100 (Hengyang, 1998, par. 1).

By the end of April, 1998, all major US MLM firms stopped recruitment and sales in China (Ligos & Cohen, 1998, par. 4). MLM experts tried to downplay the ban by offering to help crack down on illegal MLM activity and publicly declaring their trust and support in China’s market and its leadership (Madden, 1998, par. 7; O’Neill, 1999, par. 7,17). Behind the scenes, intense negations were underway. By agreeing to convert their 75 distribution outlets into retail stores, on June 5, 1998, Avon was the first to obtain a new business license for their converted retail-wholesale model. Within a month Amway followed suit and Mary Kay re-entered the market by September 2 of the same year (“When the Force is Against You,” 1998, p. 5). By October of 1998, there were only 41 licensed direct sales/MLM-quasi-retail-wholesale companies in China (“Corporate strategies: Amway Profits from Wide Appeal,” 1997, p. 1).

MLM Companies In China: Introduction

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PAST OBSTACLES BECOME FUTURE OPPORTUNITIES

Multilevel or direct marketing is arguably one of the most effective available systems of marketing a unique product with low overhead costs. The largest multilevel marketing or MLM firms are based in the nutraceutical or health industry. Although many MLM firms earn revenues of tens of billions of dollars annually, for many the phrase ‘multilevel marketing’ carries the strong negative connotations of pyramids and Ponzi-schemes. Unfortunately for many MLM firms, these negative perceptions are shared by the government and social institutions of one the biggest potential markets in the world: China.

In 2005, with its 1.3 billion people and a gross domestic product (GDP) of approximately $5,600 per capita, China stands as the third-largest economy in the world after the European Union (CIA, 2005, p.7). Initial attempts at multilevel marketing in China were met with bitter setbacks when bad press, ignorant management, lack of political cooperation and socially contrary marketing closed all legal MLM operation in China by 1998.

Today’s movement of rapid globalization continues to emphasize the need for balance in our world of complex systems. The necessary balances of political, economic and social institutions in China are not very well understood by most MLM companies. Although the difficult obstacles that previously inhibited multilevel marketing are beginning to give way, the past experiences of the pioneering leaders in China leave several clues for a more efficient method of penetration and maintenance in the Chinese marketplace. With further study into the relationships of business and government in China, an effective balance of political, economic, media and social institutions can be established. This balanced approach can thus help companies avoid many of the problems MLM companies face in the beginning stages of doing business in China.

Brief History of Business in China

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For anyone interested in getting a slice of the giant moon cake available in China’s economy right now, there are a few things you may want to consider.

THE NATURE AND BRIEF HISTORY OF BUSINESS IN CHINA

China has an estimated population of 1.3 billion, and a per capita GDP of approximately $5,600 (purchasing power parity) (CIA, 2005). In December of 2001, China was inducted as a member of the World Trade Organization or WTO, something once conceived as nearly impossible. Theoretically, this membership should allow unprecedented access and international comparability to China’s markets. Although many critics still argue about the positive or negative effects that will come from participation in the WTO, both optimists and pessimists agree that change is eminent (“A Dragon Out of Puff,” 2002, par. 2). Beijing officials claim that China’s economy has been growing at 7%-8% in recent years. China’s large population and relatively strong purchasing power parity helped it to become the world’s second biggest economy in 2002, with no immediate signs of slowing down (“Business Environment,” 2005).

Figure 1

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In 2004 alone, China attracted an estimated US$60b dollars in direct foreign investment (“Business Environment,” 2005). In the 2005 CIA report on China, “Foreign investment remains a strong element in China’s remarkable economic growth” (p.8) As of 2001, nearly 400 of the top 500 multinational companies had already invested in Chinese operations. Two decades of incredible growth gives China the fastest growing economy in the world (Luo, 2001, p. 18). With a labor force of over 761 million and a current industrial production growth rate of 17.1%, China dominates the world in terms of production and growth (CIA, 2005).

Guanxi

A very important aspect of Chinese business is the concept of special networking and leverage of relationships known as guanxi. Although the concept of networking has existed in one form or another within all of the earth’s societies, it has evolved in Chinese society to become a calculated and consuming science. According to Yadong Luo (2001, p.53), a former associate of the Ministry of Foreign Economic Relations and Trade, China; “[Guanxi] binds literally millions of Chinese firms into a social and business web.”

Chinese culture has stressed the importance of relationships and social order since as early as the 6th century B.C. The Chinese philosopher Confucius delineated the importance and responsibilities of relationships within society. Although traditional Confucian society is no longer commonly practiced in its entirety in today’s China, modern day guanxi continues to help define the importance and responsibilities of various relationships. The two types of relationships that serve as a basis for guanxi in China are familial and social. Although the value and leverage associated with different types of guanxi is a dynamic variable and adapts to the changing environment of China, family guanxi remains as the most important basis for guanxi. Social guanxi is not to be discounted in importance; however the traditional and practical roots of family clearly have first priority in China (Luo, 2001, p.54).

Extending beyond solely social dynamics, the establishment and maintenance of guanxi in Chinese society is mandatory for the success and vitality of any business (Luo, 2001, p.54).

Man Makes the Law

China’s laws come from the ‘top-down legislation’ of the central government. Without the checks and balances that arise from opposing political parties and the general public, regulations and policies from the central government are subject to rapid change (Blackman, 2000, p.170). The speed and accompanying lack of transparency allowed among bureaucratic leaders creates an environment conducive to bias and corruption.
In the book, China Business, The Rules of the Game (2000, p. 33), Carol Blackman shared a story about a partner-invested firm that did not possess the titles to both the equipment and land they needed to use for their business:

    Unless something was done…the joint venture would collapse, as [a] title was required to borrow working capital. The vice mayor said simply, ‘In China we have rule by man. Man makes the law.’ His unspoken implication was: ‘Man can change the law.’

The lack of uniform policy is strong evidence of this system. The sweeping legislation of the national government must adapt to the myriad of different local leaders and ethnicities. Carol Blackman stated, “Exceptions are allowed to almost all Central government regulations” (2000, p.177). The relative nature of these policies and regulations creates a system where adaptation and understanding are mandatory for success.

Business and Government

Business and government bureaucracy are inseparable. Although in recent decades China has begun privatizing many of its state-owned industries, managers and representatives of businesses continue to confront the power of Chinese bureaucracy. In 1998, in a survey conducted by the United States-China business council, government interference was identified as a key problem for foreign invested firms (Blackman, 2000, p.170). Government interference in business remains a primary criticism of foreign investment policy (Naughton, 2004).

The mixture of bureaucracy and business should not be perceived as an obstacle or weed to be exterminated. Rather it is an integral part of Chinese business. Mr. Shawn Hu, a private consultant to the Chinese government, offered his advice about doing business in China when he said, “Many Western companies think they can come into China and do only business—they are wrong. You must work with both government and business if you want your company to be successful” (personal communication, October 19, 2003).

Media and Social Ideology

Chinese nationalism and social ideologies are major components of modern Chinese society. The campaigns of Mao and his successors have a strong history of using excessive political propaganda. For more than 60 years, the Chinese Communist Party has retained all rights to censorship in the media and press in China.

Media control and censorship was a major tool of the government to instill the Maoist ideology into the people. As of today, China has more than 3,240 television broadcast stations. Of these stations, the largest 209 television broadcast stations are owned by the central government, China Central Television (CCTV). Thirty one stations are provincial stations and nearly 3,000 are local city stations (CIA, 2005). China’s efforts towards communication development within its network of more than 280 million television sets (Mcdonald, 1998, par. 35) demonstrate the staggering potential and influence of the government in terms of national communication.